Fast-growing and larger, established businesses have a choice. Do they run on a Tier 1 enterprise resource planning solution such as SAP S/4HANA Private or Oracle Fusion Cloud, or do they go with a mid-market ERP solution such as SAP Cloud ERP or Microsoft Dynamics?
Answering this question looks complicated at first, because ERP solutions are vast and complex. But really it isn’t a hard decision for most businesses. That’s because the difference between Tier 1 ERP and mid-market solutions is not primarily about technology. It is about business size, complexity, and total cost of ownership.
There are three basic categories of ERP.
There are small business solutions for startups and smaller organizations with revenue typically of less than $50 million, solutions such as SAP Business One. There is mid-market ERP for fast-growing and larger businesses such as contract manufacturing operations and companies such as shoe manufacturing unicorn, Rothy’s. These mid-market solutions include SAP Cloud ERP, Microsoft Dynamics, Acumatica and Sage.
Then there are Tier 1 ERP solutions for large multinationals such as Coca-Cola and the oil majors such as BP. These Tier 1 solutions include systems such as SAP S/4HANA Private Edition and Oracle Fusion.
Both mid-market cloud ERP and Tier 1 ERP are capable of powering complex businesses with demanding operational requirements. Any company with an ERP beyond the small business category will have the operational functionality it needs, the automation and connectivity, and the robustness for complex scenarios and high order volumes.
The choice between a mid-market cloud ERP solution and a Tier 1 offering is more about business size today and the level of customization and regulatory compliance that is required. Tier 1 ERP offers the widest level of customization and control, but at a high cost in terms of complexity and annual spend. A large multinational might need this, but most businesses do not.
The size of an organization is a key factor when determining whether to go with a mid-market solution or a Tier 1 ERP.
Most mid-market cloud ERP systems are scalable, and in the case of SAP Cloud ERP, it is even powered by the same underlying ERP core used by the Tier 1 offering. But the structure, default applications, and scale of a mid-market ERP are designed for businesses with moderately complex operations and employee headcounts in the hundreds or low thousands.
Mid-market ERP assumes a business is large but not extremely large, basically with the scale, operational complexity, global footprint, and IT department to match.
While a growing or mature business can scale operations with one of these mid-market ERP solutions, a company that already is a large global conglomerate is often better served by a Tier 1 ERP explicitly designed for such large enterprises.
Tier 1 ERP expects highly complex custom processes, employees that reach into the hundreds of thousands, and a footprint that includes multiple countries, multiple business entities, and a wide range of tax regimes and varied compliance requirements.
So if your company is already a Pfizer or a Coca-Cola, Tier 1 ERP makes sense. If not, you probably want a mid-market solution.
Most mid-market cloud ERP solutions are built around a standardized process methodology. Instead of reinventing the wheel, a business takes advantage of industry best practices for common operational processes that come mostly ready out of the box. A business can customize how the system operates, but it is assumed that most businesses won’t want or need this level of customization and control.
The upside of reliance on standardized processes is greatly reduced system complexity and maintenance, since custom code slows down rollout and system agility, and it requires much more effort to maintain and get things right.
Tier 1 ERP, on the other hand, is designed for large organizations that explicitly need lots of customization and have the IT staff to support it. These Tier 1 solutions are the historical stereotype of ERP: big, complex, expensive to implement and maintain, and brittle.
One upside of a Tier 1 ERP solution beyond the expectation that it will be deeply customized is that it also comes with total control. Mid-market cloud ERP is hosted in the public cloud, and the underlying infrastructure is managed by the vendor, while Tier 1 ERP usually is hosted on-premises or in a private cloud environment where the business itself runs and maintains the system. Both types of systems are secure, but Tier 1 ERP sometimes is needed for regulated industries that must have strict end-to-end governance, such as financial services companies.
Does your business want a standards-based approach or will it require lots of customization and underlying system ownership? Answering this question helps you decide between a mid-market solution and a Tier 1 offering.
There’s a large cost difference between mid-market cloud ERP and tier 1 solutions.
First, there’s the cost of rolling out the new system.
A mid-market ERP hosted on the public cloud and relying on standardized processes instead of deep customization can be rolled out affordably and in a matter of months. Essentially, a business is signing up for a cloud subscription, configuring the system, and importing data.
A Tier 1 ERP often takes a year or more to implement, and it entails a much higher initial spend to purchase hardware, develop code, and tailor the solution to the needs of the business.
Then there’s maintenance and ongoing costs. A mid-market cloud ERP is hosted by the software vendor and entails a predictable monthly operating cost that can scale as a business evolves. A Tier 1 ERP requires a higher capital expense and then ongoing maintenance and internal IT support in addition to software licensing. Over time, a Tier 1 ERP has a total cost in the millions, while a mid-market solution does not.
If there’s a true need for the complexity and control of a Tier 1 ERP, this cost makes sense. But for most businesses, the cost savings from a mid-market ERP are more than enough to tip the decision toward the mid-market solution.
We’ve been helping businesses select and implement the right ERP solution for more than 20+ years as an SAP Gold Partner. For help figuring out which solution might be right for your organization, or for deep-dive questions, contact one of our experienced ERP consultants by calling (801) 642-0123 or by writing us at info@nbs-us.com.